Companies discussed include:
Brambles (ASX:BXB)
Wesfarmers (ASX:WES)
ASX (ASX:ASX)
The following transcript was automatically generated:
Hi. My name’s Chris Pedersen, and this is Stock Watch on Wednesday, the 29th November 2023. Any advice is general advice and may not be suitable for you. Always consult an advisor before making any investment. All questions from viewers should be sent to [email protected]. Here are my market observations for today. Historically, equity markets trend up leading into the new year, so we’re almost in December.
December is usually a very positive month. Also January keep watching seven and ten year bond interest rates. If the interest rate goes up, equity markets get weak and vice versa. Iron ore and copper are both remaining strong. However, that said, iron ore last night was down quite a bit. There’s a lot of political noise ignored. Here’s an interesting comment about European politics.
I just said ignore politics, but this is interesting nonetheless. Geert Wilders is a far right politician and is very anti immigration anti-Islam. He won 37 seats in the recent Dutch election. Before you worry he needs an additional 39 seats to form a ruling government. This will probably be difficult. He would massively disrupt the EU in Brussels in terms of a lot of their policies.
Here is the S&P 500 historically in the month of November. What you see from this chart, you look over 2023 that this month was very strong. That is positive leading into the end of the year and for the next year. These are global mergers and acquisition deals. As you can see at the bottom, 2023 is on the low side.
It’s a little ominous. Rising interest rates is causing a problem for buyers. Here is a chart on uses of nickel. As you can see, stainless steel is the biggest. This chart is fascinating for the cost of turkey. Me. You know, it’s a big bird that gobble gobble. 1 USD is about what a pound costs in the United States these days at the wholesale level.
That translates to $3.40 Australian per kilo. What do you pay for Turkey when you go to the supermarket? It’s pretty shocking. Three companies caught my eye I wanted to share this week. Brambles Ltd is the first. The code is PCP. It closed last night at $13.02. I’ve liked Brambles for quite some time. Let’s go into the numbers up.
This chart here is a bit by divisions in US dollars. So you can take a look at this one. You have time. Here are the fundamental numbers I usually go through. I have a 12 month price target for Brambles of $16.10. This is $3 above where it’s trading revenue growth rate from 2023 to 2026. Estimates I have is around 6.7% per annum and the earnings growth.
This is why I like the company is 12.8% per annum and the dividend growth rate is 13.8% per annum. These are all very solid numbers. The p, e and 2025 earnings estimate of $0.92 is only 14 times the yield on the 2025 dividend estimate of $0.53 is 4.1. Free cash flow is 4% and the payout ratio is only averaging around 57%.
So what does Brambles do? They make pallets. They keep track of policy supply pallets for shipping industry. It’s global. It’s a boring business. Keeping track of all these pallets around the world is crazy. However, they make it work. Slowing 2024 is factored in, so if 2024 doesn’t slow down, then these estimates will only go up. I rated by I like boring companies that continue to deliver Wesfarmers.
Everybody knows them. The code is WTS on the ASX and it closed last night at $52.22. Here is the divisional pie chart on EBIDTA. What you see in orange is Bunnings. So when you think of Wesfarmers, think of Bunnings, yes, they own Officeworks, that’s not that big and they own other businesses like chemical, energy, fertilizer, but Bunnings is the main driver for this company.
Return on capital by division. Well you can see Bunnings is by far one of the better. And here we have these Bunnings sales and margin. So the thin black line is the margin, but the orange is the annual growth in sales. This is why people like Wesfarmers is now looking at the actual fundamental numbers here. I have a 12 month price target of $56.25.
A lot of brokers are a little bit more than that. It is a large company, by the way, in terms of capitalization, 60 billion and the revenue growth for each of the next two years, including this year. For total, the three is only 3.8% per annum. However, earnings per share growth in this period is 9% per annum and the dividend growth rate is 10% per annum.
The PE on the 2025 earnings estimate of $2.48 is 21 times. That’s not a bad p e multiple When you take a look at the ASX 200 and just focus on industrial companies, the yield on the 2025 dividend estimate is $2.31 is 4.4%. It has an okay free cash flow of 4.4%. Its payout ratio is very high, but it’s always been very high ten 93%.
They are growing revenue slower than inflation plus population growth rates. This has always bothered me through the years. However, they tend to do just fine. Their earnings are good and their yield is good. Wesfarmers is a core member of most institutional portfolios because of the EPS and dividend growth rates being attractive. I rated to buy but only half wait.
The third company I am covering today is ASX Ltd. The code is ASX of course closed last night at $57.34 It rallied yesterday. So let’s take a look at this company. It has a market cap of 11 billion. Well, it’s down a lot because ASX not that long ago was trading around $90 above 90. 12 month price target.
I have is only 48 and that’s off a p e multiple model. The revenue growth rate I have for 2023 to 2026 estimate is 4.6% per annum. Well, that’s pretty good. Bear in mind ASX kind of a monopoly, but they have competition, which I’ll explain the earnings per share growth rate in this period is only 3.1% per annum and the dividend growth rate is only 1.3% per annum.
This company is under attack. Chi-X was a competing exchange has been bought by the CBOE. CBOE is short for Chicago Board option exchange. They were the first option exchange in the world and they are huge. They have amazing technology. What they are looking at doing in our market after they bought Chi-X is they want to increase their exposure with derivatives.
They want to do listing of companies, initial public offerings. They also want to get involved in settlement and clearing. These are all at the ASX as expense. The estimates I had previously are taking a lot of broker estimates, but my price target is lower than everybody because I feel that there’s going to be earnings downgrades as the CBOE starts to deliver on its objectives.
You don’t buy a company in a foreign land to do nothing, you buy it to grow it and the competition is ASX and the ASX is not really woken up to this fact yet. The PE on 2025 earnings for ASX is $2.57. This is a 22 time multiple. This is too high for the company. It doesn’t deserve this multiple.
Let’s take a look at the yield though, because a lot of times they high multiple will be because it’s a high yielding company and the yield is holding the stock up. The yield on the 2025 dividend estimate $2.18 sense is 3.8%. So this yield is not that great. That’s because he had cut the dividend payout because they have to spend more on their whole debacle with clearing and settling the chest system versus blockchain.
You’ve read about that in the news. They’ve had to write off hundreds of millions of dollars. Every division at the ASX is under attack from CBOE. I rate them as a short sell or if you have it in your portfolio, I wouldn’t own it yet, but because you never know on short sales I have. It is half wait.
But you have to realize it’s already declined a lot from over 90 down to where it is now. And yesterday it bounced, but it still has a high p e off a broker forward estimates and those estimates are probably on the high side. As always, send an email request, to [email protected].
If you want to learn more or get more details on anything I cover today, if you have a request for a specific company you’d like me to look at, send it in. Hope you have a wonderful week and it’s profitable. Thank you.